Sunday, September 14, 2008

Price Elasticity

I've been thinking about this term a lot this week. Price elasticity refers to the range of prices that a retail store can charge for a product, without alienating a customer. Some games have more elasticity than others, but all games have far less elasticity than other types of products. In the rest of the retail universe, there is far more elasticity than in games. How much is a gallon of milk? Poll a bunch of people and you'll get a large range of numbers. If you're a presidential candidate, you're probably wildly off. Milk is a commodity item, but how about other specialty trades? Toys have a lot of price elasticity, and consumers tend not to notice a whole lot. The cost of a Blokus game sells at our store for $30, but you'll find it at many toy stores for $35, and even upwards of $50 at fancy toy stores in boutique communities in Marin.

What creates price inelasticity in the game trade is the MSRP, the manufacturers suggested retail price. This price is reinforced by the manufacturer, who publishes this price on their website and often sells the game direct to customers at this price. There's nothing inherently wrong with an MSRP, but the game trade goes a step further and tightly controls the cost of the product sold to the retailer. This is done with discounts, averaging around 45% or sometimes net pricing, where the item costs "X" but you can charge what you want for it. However, the benefits of net pricing are often destroyed by the MSRP. An item might be net priced at $40, meaning the "keystone' amount to charge for it would be $80, but when the manufacturer turns around and sells it for $70, a de-facto MSRP is created, they deny the retailer the ability to sell it at a price of their choosing. I would also argue that manufacturers are forced to sell direct to customers at MSRP because of the inefficiencies of the game distribution system. Fix this, or remove it, and manufacturers can forgoe all that hard work.

This discussion is nothing new, but what I'm coming to realize is that the game trade, which is continually shrinking their margins for retailers, is limiting the ability of retailers in the types of stores that can be successful. The game store model that work is a well defined promotional model involving large amounts of unproductive game space to promote product. Those who don't want to go that route, or can't afford it, are forced to put great efforts into promoting their stores through community involvement our other tangential activities besides selling games. These working models and outside activities are fantastic; nothing wrong with them, but in the past they've been the domain of exceptional, top tier stores. Now they're required for basic survival of ALL game stores. It's a sign that the model is distressed.

In contrast, a retail model with greater price elasticity is able to charge more for a product in exchange for more versatility in their store operations. A store could exist in an expensive downtown area, for example, or in a lucrative but high cost shopping mall. In fact, game stores that do this tend to sell the games with the highest price elasticity, board games, often reinforced with other high elasticity products, like toys. Board games sold to consumers and not hobbyists have much higher price elasticity, as they shop infrequently and aren't dedicated to board gaming as a hobby. Meanwhile, straight game stores must pimp their product like circus geeks to hobbyist consumers who are well informed by the manufacturer of precisely what their product costs, a model that is increasingly obsolete for real-estate markets with rising rents. What works in the MidWest for a modest store with low costs per square foot only works for an exceptional store in expensive urban areas.

The solution is to give up on the obsolete model based on cheap fuel (the free freight model) and for everything to be net priced. Everyone pays freight. Everyone gets their product at "x" amount, whether you spend a thousand dollars a year or a hundred thousand dollars a year. If a distributor wants to offer further incentives or discounts, that's their decision. Once the benefit or penalty of free shipping is removed, a rising cost that forces distributors to shrink margins, the playing field would be de-leveled. A level playing field is not what we want. We want a variety of true costs that works against MSRP, the enemy of price elasticity and store creativity. Then we'll have more of a chance to run a variety of different types of stores that will promote and reinvigorate the hobby.

8 comments:

The hobby game industry grew up on RPGs, which follow the book industry. i.e. pre-printed price on book, sold to retailers/wholesalers at a discount off of retail.

But with the advent of so many other areas of hobby games (CCG's, CMGs, tactical minis, board games), this "discount off retail" model is as you say - out of date, and crippling the industry.

You will find that YuGiOh has wider price elasticity than Magic I think. This is directly attributed to Upper Deck doing exactly what you recommend - net pricing, you pay for shipping (or no one pays for shipping, i don't know which). Sadly a lot of other shenanigans Upper Deck gets up to hurts retailers in other ways.

The big step would be for WotC to price like Hasbro does, and sell everything net. And *remove* the prices on their products. That is so critical. However, that may never happen because so much of WotC RPG product is sold into the book chains, and my belief is they demand prices on their books.

Basically, the future of the hobby game industry is held hostage to the book industry.

It's why the entertainment model has taken off, because you have huge price elasticity... Huge. Especially since your you also have cost elasticity too, which you don't have with new games.

Gary, did you post this article in the GIN? I really feel like this topic needs to be pounded on regularly to game retailers, and then they can start to demand change from their suppliers.

Upper Deck has a retail price on their website, creating a de-facto margin of less than 40%. However, stores like Target ignore that and mark up UD considerably, giving game stores some elasticity. For example, Target sells boosters of YGO for $4.99, while the UD price is a sub 40% margin 3.99. Because of Target, games stores have a wide range (we do 4.19).

As for the GIN, there are brilliant minds there, but not a lot of breadth of opinion. I've given up on it.

I tend to agree with you, but I don't know how much good it would do in the end. Gamers are geeks, geeks tend to use the internet, and the internet is the death of true price elasticity.

You mention Hasbro, so I'll use them as an example. I geeked out for a bit on Transformers after the movie came out. While Hasbro might not give an official MSRP, I was able to quickly determine the true street price of the toys with a quick google search. Any retailer that priced their goods more than $.50 over that price wasn't going to get my business. In practice most of the stores I checked, both online and retail, were all within a $1 of each other on their prices for in-production toys. There didn't appear to be much elasticity there.

The one good thing it would do is keep companies from trying to avoid passing on costs to the consumer by cutting margins instead of raising the MSRP, and for that reason alone I think it's probably worth going to the net pricing model.

I think even gamers have some elasticity in their prices. Ite depends on what they're buying. Some things have zero elasticity, such as most RPG books, with standardized pricing and prices printed on the covers.

Some things have much more elasticity, such as miniatures, dice, board games, and some collectible cards.

The goal for the retailer is not to "gauge" customers at every opportunity, it's to be able to respond to the marketplace when you're given that short discount that effects your survival. Bumping up a price by 2-3% on specific product lines is often enough to compensate.

My local competitor that closed recently tended to use price elasticity whenever he could get away with it: Reaper minis and board games especially. My goal is to use that bump on the items that are shorted, but unfortunately, they're often the same items that manufacturers clearly want you to hold their line on the MSRP (sold direct, price printed on the box, etc), so I'm beginning to understand you might need to compensate elsewhere on more elastic lines.

Credit card fees are another example of a middle-man holding a business hostage. The fees have seen a steady rise and although you can shop around for better rates, there is a baseline price for these fees and they rise steadily.

According to vendor agreements, stores are not supposed to charge a credit card fee or require a minimum credit card purchase, but everyone does anyway. We instituted a $5 minimum after far too many people wanting to buy a Coke with a credit card.

So ya know, every transaction costs around 35 cents, plus around 2% of the transaction.

Yeah, in practice it seems that credit card companies will let most small and some medium size businesses get away with bending vendor agreements in exchange for having their credit cards useful in more places.

The only other alternative would be to rethink the base charge per transaction fee, and they're less willing to do that.